Climate Conscious: Rapid growth in the sustainable financing ecosystem

India’s goal to achieve net-zero carbon emissions by 2070 requires fundamental and con­scious changes in the infrastructure sector. Financial investments are needed to enable the transition towards projects that are not only environmentally conscious but also responsive to climate change. This requires an appropriate and strong incentive structure for the improved allocation of funds by selective financing mechanisms, also known as green financing. To this end, the United Nations has identified a three-pronged approach — aiding the public sector, encouraging public-private pa­rt­nerships, and increasing the capacity of community enterprises on microcredits.

India is moving towards the uptake of multiple tools and strategies in alignment with this approach. These include the adoption of sovereign green bonds (SGBs), sustainability-linked loans (SLLs), carbon credits, and the environment, social and governance (ESG) strategy. The­se im­prove the financial flow from the public, private and not-for-profit sectors to sustainable development priorities such as clean and green techno­logies, nature-based solutions, and sus­tain­ab­le infrastructure with a reasonable rate of return and greater accountability. Re­portedly, the sustainable debt issuance market stood at $13.7 billion in 2021. Further, $19.38 billion worth of green bonds and $28.3 bi­llion worth of SLLs have been issued as of Oc­tober 7, 2022. These are mainly issued by in­dus­trial sector firms such as UPL Limited, JSW Steel, and Ultra­tech Cement. The key sectors that have utilised these instruments are renewable energy and electric mobility while sectors like non-banking finance companies, banks, che­micals, pharmaceuticals, and metals are also unleashing their potential.

Developing the green bond market through SGBs

India achieved a major sustainable developme­nt milestone with the release of a green bond framework on November 9, 2022. This initiative highlights the government’s commitment to­wards creating green and sustainable infrastructure. Being a fixed-income instrument, SGBs will fund sustainable projects across sectors such as renewables, urban transportation, roads, railways and agriculture, as well as the so­cial sector. Hydro projects larger than 25 MW, nuclear projects and biomass-based po­wer generation (wherein biomass comes from protected areas) projects would not find funding under this framework.

The Ministry of Finance has undergone con­sultations with the Reserve Bank of India (RBI), multilateral institutions and other stakeholders for its finalisation. Subsequently, it has planned to issue Rs 160 billion of bonds during October 2022 to March 2023, which is close to 1 per cent of the overall borrowing for the year 2022-23. A green finance working committee will en­sure the allocation of funds within a period of one year from the date of issuance. This mark­et would also provide a fillip to the private gre­en bond market and act as a benchmark for future issuances by private entities.

SLLs gaining ground 

SLLs are formulated by experienced working parties with representatives from leading fi­nan­cial institutions active in the global syndicated loan markets. This financial tool has ga­in­ed momentum in India with $2.45 billion SLLs issued till October 7, 2022, as per industry reports. In a recent development, a loan of Rs 2 billion was secured by Larsen & Toubro (L&T) Finance from the Indian arm of the Fren­ch multinational investment bank and financial services company Société Générale in March 2022. Its three sustainability-linked key performance indicators are responsible lending to women entrepreneurs, especially from underserved communities; water positivity; and carbon sequestration. L&T also closed a three-year $107 million SLL from the Sumitomo Mitsui Banking Corporation in November 2022.

Meanwhile, Tata Power has raised $320 million SLLs from foreign lenders led by the Bank of America as of August 2022. Under its compliance, the company is bound to generate thermal power in the coming few years, otherwise, it wo­uld be rewarded by a reduction in interest rates by up to eight basis points. It is also required to increase renewable power generation by 1.5-2 GW every year in order to ac­cess additional cost-related incentives. Apart from augmenting new capacity, the proceeds from the loan would be used by the company subsidiaries to refinance their existing loans. In the past, the Union Bank of India and JSW Cement have also raised SLLs as part of their ESG objectives.

ESG strategy and carbon credits

India has a significant opportunity to mobilise investments of up to $1 trillion focused on ESG-related goals according to the Standard Chartered Bank. Corporate companies have the benefit of access to low-cost ESG funds from the disclosure of the ESG metrics and the roadmap adopted by them. Many acquisitions have taken place in this space in recent times. In October 2021, Adani Green Energy Limited acquired SB Energy India’s assets, making it India’s largest renewables merger and acquisition deal. Similarly, Shell acquir­ed Indian renewables firm Sprng Energy in August 2022. These acquisitions are aligned with the ESG strategy of these conglomerates. Large inves­tors have also acquired stakes in domestic companies such as Tata Power and Greenko as these companies pivot towards renewables. Banks are also becoming responsible lenders and factoring in ESG risks in the­ir credit appraisals.

Furthermore, to accelerate India’s transition to a carbon-neutral economy, the Energy Conservation (Amendment) Bill, 2022 was passed. It facilitates the domestic carbon credit trading market in the country while allowing Indian government agencies to issue carbon trade certificates. Many Indian smart cities that have captured this market include the Bhuba­neswar, Varanasi and Indore smart cities. Bhu­baneswar Smart City Limited has appointed a special purpose vehicle called KEI for the identification of potential projects and initiatives, and the preparation of proposals for issuing carbon credits for the development activities in the city. Indore Smart City Development Limi­ted has awarded a contract to EKI Energy Ser­vices for consulting services for carbon credit solutions. EKI Energy Services will monetise carbon emission reductions while offering technological solutions in the areas of compost formation, biomethanation, sewage treatment plants, electric vehicles and charging stations, among others.


The green financing routes are a new entrant in the finance market. While they are being strengthened with policy and regulatory interventions, there are a few elementary chall­en­ges in their path. For instance, the framework developed for SGBs includes funding for compressed natural gas (CNG) used in public transportation projects. Since CNG is a fossil fuel, it does not align with the objective of green transition and is against the interests of ESG investors. The other issues include ambiguity in the use of SGBs for refinancing existing projects, the proportion of their distribution as co­m­pared to financing new projects, and determination of the coupon rate as compared to regular bonds. It would be necessary to ensure proper monitoring of these projects for a good completion rate along with the application of a penalty for non-compliance with the timelines. With the prevailing challenges, the green bond market is currently at a meagre 0.7 per cent of the Indian bond market with an issuance value of Rs 6.11 billion in 2021.

In the ESG domain, there are some significant barriers for investors. These are accessibility, comparability and comprehensibility in the order of significance. As per industry experts, financial institutions will be helpful in making the existing capital available to navigate through these barriers. The carbon market also needs a National Carbon Registry regulated by legislation that can link private players’ initiatives and promote their participation in international voluntary carbon trading for increased foreign direct investments.

The way forward

With India’s 75 per cent of districts classified as hotspots for extreme climate events, integrating climate resilience with the infrastructure sectors is important. Indian banks would soon urge RBI to grant priority sector lending status to sustainable financing tools including green deposits, which is a fixed-term deposit for investors aiming to invest their surplus cash reserves in sustainable projects. Foreign banks like Standard Chartered will also undertake an analysis of this financing route under the Indian Banks’ Association. A positive growth graph for green financing is expected in the future, with the ongoing expansion of the infrastructure sectors.